ONS '14: U.S. shale causing imminent need for NCS cost reductions

8/25/2014

ONS '14: U.S. shale causing imminent need for NCS cost reductions

ANNE EKERN, Contributing Editor

STAVANGER, Norway -- Oil companies and suppliers agree that there is an urgent need for significant cost reductions on the Norwegian Continental Shelf (NCS). Entering into an era with more complex and smaller fields, in deeper water, and more fields being located further from the market, reinforces this need.

“We saw oil prices rising steadily until 2012. Companies can no longer rely on the price to grow, causing an immense pressure on companies to reduce costs and scrutinize capital expenditure,” said Torbjørn Kjus, senior oil analyst with DNB, while addressing the ONS 2014 audience on Aug. 25

“We are in a different world than we were only two years ago. The emergence of U.S. shale has completely changed the situation,” said Kjus.

The U.S. has, traditionally, been the key market for global oil demand. Having added production of about 3 MMbpd of domestically produced oil over the last three to four years, and with a potential, additional 11 MMbpd, of commercially viable projects, worldwide, at an oil price of $80-85/bbl, this will likely continue to put a downward pressure on the price (per a Goldman Sachs chart that he showed).

“At the same time, oil companies are facing higher and higher prices to get new resources to the market. Most market analysts agree that the WTI price should be around at least $105 per barrel, whereas the current WTI price is right above $90, and closer to the break-even price of a number of shale projects,” Kjus said.

According to Kjus and DNB, after years of continuous growth, global offshore spending has already flattened at approximately $200 billion.

“With the leveling out of the oil price, we have already started to see cost levels dropping. We also have seen investment shifting from offshore to onshore, and a gradual shift away from investing in higher-cost regions like the NCS,” Kjus said. “Based on experience, we will likely see a lagged effect on this, in terms of significantly less investments and suffering production, four to five years down the road.”